Economic Consulting applied to law

Marcelo Saguan, senior energy economist at Microeconomix was the economic expert in the Florence School of Regulation team which advised TenneT on the UK charging system on inteconnectors.

Executive Summary

Economic Analysis

British Charges for interconnectors and completion of the EU single market in electricity:

• UK network charges applied to interconnectors create, in general, pancaking problems and cross-border inefficiencies such as:
  • Limitation of competition in the internal market
  • Restriction of efficient cross-border transactions
  • Increase of implementation costs on market integration
  • Distortion of interconnection investment incentives
• The Transmission Network Use of System (TNUoS) charges, as well as most part of Balancing Services Use of System (BSUoS) charges (excluding internal congestion costs), aim to recover UK (network and operation) fixed cost. Applying them to (hourly) cross-border transactions implies pancaking problems and an inefficient outcome.
• Applying the part of BSUoS charges corresponding to (variable) internal congestion costs to interconnectors would be justified economically only if these charges are properly implemented, i.e. if they are cost reflective with respect to cross-border transactions. Current BSUoS charges are not cost-reflective because they do not represent the supplementary cost of national balancing services due to a specific transaction. Therefore they do not give efficient signal to cross-border transactions.
• Losses ‘charges’ related to UK national system losses also create pancaking problems and could not be totally justified by an economic rationale; they have no locational component and do not represent the supplementary cost of national losses costs due to a specific cross-border transaction. To the opposite, losses ‘charges’ related to interconnector losses are rationally applied and do not create pancaking problems.

British Charges for interconnectors, compensation and harmonization issues:

• A workable EU internal electricity market can only be achieved if compensation and harmonization issues among TSOs are solved.
• The Inter-TSO compensation mechanism and the harmonization guidelines are an important step forward. However, they not all address comprehensively compensation and harmonization issues.
• As a result, there could be a case for charging interconnector users to ensure compensation and harmonization between NGET and Tennet.
• However, the existing charging system implemented unilaterally by NGET to tackle compensation or harmonization problems are far to be efficient and effective because:
  • It creates pancaking problems and cross-border inefficiencies
  • It creates automatic compensation even when compensation is not needed.
  • When compensation is needed, charges are usually not cost-reflective It does not solve the harmonization problem in the European interest
• In conclusion, compensation and harmonization issues naturally call for comprehensive and EU-wide solutions. From an economic point of view, unsolved issues should be tackled by improving current EU instruments and not by charging cross-border transactions.

Legal Analysis

British Charges for interconnectors and sector-specific legislation:

• The UK charges system as imposed to date on interconnectors does not comply with the sector specific legislation.
• Inter-TSO compensation and tariff harmonization is regulated at EU level by Regulation (EC) 714/2009 (respectively Regulation (EC) 1228/2003) on cross-border exchanges and the new implementing guidelines (Regulation 838/2010).
• Regulation 714/2009 provides for two complementary mechanisms:
  • compulsory inter-TSO compensation (ITC) scheme covering (real) costs incurred from hosting cross-border flows (Art 13)
  • harmonization of national tariffs to avoid trade distortions (Art 14); charges to be burn by producers and consumers.
• EU legislation categorizes interconnectors unambiguously as interfaces connecting national transmission systems. Since they are thus neither considered as producers nor as consumers they are not addressee of Art 14. As a consequence the charges NGET imposes cannot be justified on the basis of this provision.
• Compensation then can only be achieved under Art 13. The fact that the new binding ITC mechanism does not cover compensation of all costs NGET recovers through TNUoS/BSUoS charges does not allow for the unilateral imposition of compensation and thus circumventing the only relevant Art 13.
• The desired extended coverage of the ITC mechanism (providing for the recovery of those costs NGET recovers to date with the TNUoS/BSUoS charges) can only happen by means of new Art. 18 guidelines.The unilateral imposition by NGET runs counter the sector specific legislation.

British Charges for interconnectors under EU competition law

• NGET as a dominant undertaking has a special responsibility under EU competition law vis-à-vis (i) the competition process in downstream markets and (ii) the completion of the single market in general.
• NGET is responsible under EU competition law for the competition effects of the UK charging system.
• NGET abuses his dominant position because the UK charging system creates inequality between different network users and because NGET solves an internal problem to the detriment of the completion of the single market.
• Economic or non-economic nature reasons cannot objectively justify the abuse.
• The analysis pursued under alternative legal bases (essentially free movement) yields the same result.